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Wednesday, 22 August, 2001, 11:35 GMT 12:35 UK
UK economy's split widens
UK factory worker
The contrast in fortunes between the UK's buoyant services firms and its recession-hit factories, has been further exposed in official figures on economic growth.

The Office for National Statistics (ONS) says that while service industries performed better in the spring than it had previously thought, producers recorded a worse-than-expected decline.

Output from UK producers fell 1.1% in the April-to-June quarter, with production by manufacturers slumping 2% - its steepest drop for a decade.

But service sector output was revised upwards to 0.8% during the quarter, from an original estimate of 0.6%, thanks largely to unforeseen strength in the hotels and restaurant industries.

The ONS left its estimate of overall UK economic growth unchanged at 0.3% above the quarter before, or 2.1% year-on-year.

Further exacerbation

The report, which follows official confirmation that UK manufacturing has entered recession, prompted concerns about the contrasting fortunes of service and production sectors.

"What it masks is that we have seen a further exacerbation of the two speed economy," said David Page, stockbroker at Investec.

A divided economy presents problems to the Bank of England chiefs who set interest rates, sending conflicting messages over whether to cut, and risk stoking inflation, or leave rates unchanged, and risk accelerating the slump among manufacturers.

Gap to close?

But Stuart Green, at Credit Lyonnais, forecast that the output gap between production and service sectors will begin to close.

"This does represent the high point of the split that we have seen here," he said.

"The two sectors really should start to converge now."

ABN Amro's Richard Iley said Wednesday's figures raised hopes that the service industries can avoid the kind of downturn which has beset producers.

"[The report] will help soothe nerves about the extent to which the manufacturing downturn is fanning out into the service sector," he said.

See also:

26 Jun 01 | Business
Q&A: UK Balance of Payments
26 Jun 01 | Business
UK economy beats forecasts
12 Jun 01 | Business
George rules out early euro entry
21 May 01 | Business
UK trade deficit hits record high
20 Mar 01 | Business
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